© 2019 by Community Capital Corporation

Intro to the Business Lending Industry

In this article, we’ll explore US small businesses, why they’re important, and how Community Capital Corporation can help small business owners get access to the funding they deserve.


The Small Business Impact


A small business is defined as a firm that’s privately owned and has fewer employees or lower revenue than the industry standard. As a rule of thumb, they are independent businesses with fewer than 500 employees. A large majority of small business are sole proprietorships, meaning that the only employee is the owner. The rest are employers, which can be small to medium sized firms, growing startups, and local-based establishments.


Small businesses make up 99.9% of all US firms, 48% of the American private-sector workforce, and 98.5% of the high-tech industry.


Small businesses are essential to building a strong US economy.



Small Business Lending

Obtaining bank capital is essential for small business. It allows them to grow without offering any equity or ownership to an investor. Without stable cash flow, businesses can’t expand, strengthen, and hire more employees.


In 2016, 64% of small business reported facing financial challenges. According to the Federal Reserve’s Small Business Credit Survey, some commonly reported causes were operating expenses, lack of available credit, and costly debt payments. To address these issues, by far the most common next step was to use personal funds.


That’s where low-cost financing can help. Instead of withdrawing from personal savings, small business owners can take out an affordable small business loan with low interest rates and monthly payments to handle expenses and boost cash flow.


Barriers to Obtaining Affordable Financing

Unfortunately, a number of variables have led to difficulties with securing financing, especially after the 2007 recession. These can be divided into two categories: cyclical and systemic.


Some cyclical barriers include:


Sales—A decrease in sales due to the recession resulted in fewer businesses qualifying for credit

Collateral—Common sources of collateral were hit hard, especially real estate, undermining the credit strength of business owners

Lender Risk Aversion—Banks have tightened credit criteria across the board, but especially for small businesses

These issues can lead to a vicious cycle, where one problem leads into the next.


On a systemic level, a number of causes also make affordable financing less accessible:

  • Bank Consolidation and Disappearance of Community Banks.

Community banks account for nearly half of small business loans but the number of community and regional banks is declining

  • In 1984: 18,073

  • In 2012: 8,013

  • Today: ~5,000


  • Half of small businesses use one of the 18 largest banks in the US, rather than a smaller financial institution


  • High Search Costs for Borrowers

Small business owners typically approach multiple lenders and spend hours on paperwork before getting to a “yes”


  • High Transaction Costs for Lenders

The cost of making a $1 million loan and a $100,000 loan is similar, so lenders usually have a preference for larger amounts


  • Lack of Financial Information

Financial providers and small businesses do not have a single source of credit information to meet their growing need for quality data

  • Heterogeneity of Small Businesses

Loans can be difficult to underwrite because no two businesses are alike


Systemic inadequacies must be addressed on a more global scale, which is difficult to implement quickly and effectively.



Emergence of New Technology and Alternative Lending


To address these challenges, several more recent tools have come into play. New technology platforms, alternative lenders, and online marketplaces each aim to make capital more accessible. They’ve helped reduce search and transactional costs, increase efficiency in underwriting, and raise competition.


Following these technological advancements, online lending began to grow as a source of funding for small businesses. In 2017, for example, 24% of firms applied for funding directly from online lenders. As they became more popular, three primary financing models emerged:


Merchant Cash Advances


A merchant cash advance (MCA) involves “selling” future credit card transactions in exchange for a lump sum upfront. While they might sound attractive with their lenient requirements and quick time to funding, these types of agreements can come with extremely high interest rates, hidden fees, frequent payments, and short terms. In the end, they can have a drastic negative impact on business finances.


Peer-to-Peer Lending


Peer-to-peer lending brings together borrowers and investors to fund loans typically no larger than $100,000. Just as with MCAs, borrowers have a steep price to pay for convenience: shorter repayment terms, higher interest rates, and larger monthly payments add up to a significant effect on available cash flow.


Online Marketplaces


Marketplaces can be helpful by showing borrowers what’s out there in terms of the small business funding options that they’re eligible for. On the other hand, depending on the type of marketplace, they can’t extend direct financing, so small business owners might find themselves applying for a costly loan product.


Community Capital to the Rescue

Founded in Illinois after the 2008 financial crisis, Community Capital Corporation was created to give small business owners easier access to affordable funding. We help entrepreneurs obtain loans secured by the US Small Business Administration, also known as SBA loans. They’re known to have low rates, long terms, and anywhere from 5 to 20 times lower monthly payments than alternatives.


Our technology makes the SBA lending process much more efficient and cost-effective. Whereas previously, borrowers had to put in months of work into their SBA application only to receive a “no” from their chosen lender, Community Capital Corporation reduces the time to funding by matching you with the bank most likely to approve your loan.


If you have your paperwork ready, the process can move swiftly from pre-qualification to funding. Our online platform makes uploading documents and moving through the application quick and easy. We match borrowers with the bank that’s most likely to approve and fund an SBA loan for your business. If you’re not quite ready for an SBA loan or need funds more quickly than our streamlined SBA process can provide, our bank partners now offer non-SBA term loans.